Stock trading strategies

--M. Mosharraf Hossain PhD, FCA

There are numerous stock trading strategies, however, when it comes to buying and selling stocks, investors have two main stock trading paths – to choose from: short and/or long-term. Those involved in short-term trading are generally referred to as traders, while those buying and selling for the long-term are called buy-and-hold investors.  Both traders and buy-and-hold investors can be successful, but must follow different strategies in order to achieve success.

In not so active investment strategy or a buy and hold strategy in which an investor buys stocks and holds them for a long period of time, disregarding fluctuations and technical indications in the market. Conventional investing wisdom tells us that with a long time horizon, equities render a higher return. There is, however, a debate over whether a buy-and-hold strategy is superior to day to day investing strategy.

The fluctuations in market is a healthy sign and signal sort of favorable business environment liked by both traders and investors and – swimming through this wave, the short term traders  make money.

Random walk theory proponents, however, asserts that both technical analysis and other short term market timing strategies are largely a waste of time and states that a long-term buy-and-hold strategy is the best and the investors must not try to time the market and those who want to do are living in the fools errands – any sort of analysis is futile, according to the theory.

A buy-and-hold strategy has tax benefits, however, because long-term investments tend to be taxed at a lower rate than short-term investments. This in our case only refers to the brokers houses because ordinary investors’ accounts are so far not taxed.

Obviously, there are differences between short-term and long-term investments. Short-term trading are generally designed to be made only for a little period of time, but striving for desired level of profits needed very close attention to the market behavior which demands the traders to be able to time for buy and sales, whereas long-term investments are designed to last for years, not bothering about intermittent ups and downs, showing a slow but steady increase so that there is a significant yield at the end of the term

Short-Term Stock Trading Strategies

For all kinds of trading, the bourses must remain open for every day trading – the volume of commissions they earn every day is important for them to keep their businesses going; there will be some small traders who almost on every day mostly taking on T+3 strategies deploy money to run their weekly expenses.

The world of a short term traders, therefore, requires them to keep on top current and historical stock prices. Their stock trading strategy includes maneuvering between the opening and closing prices and make judgmental forecasts to know the precise moment to enter or close a stock position. Short-term trading can be very lucrative as well, but it is also risky. Traders can enter and exit a stock position over the course of one or a few days.

Experienced traders try to evaluate the technical indicators of a stock and make judgments on whether the stock will be an immediate gain or loss. Some people say, Stock market tells you what it’s going to do before it happens, if you pay attention to it -. Stock market will send you signals about what direction it is heading, provided you pay attention.

It is important to have an idea of what the market seems to be and about information:  on Price and volume – volume tells you whether there is movement in the market and price tells you which direction.  Short-term traders must, therefore, understand investing patterns and grasp the market trends and take quick decisions in order to make gains.

Reading the market from one day to the next day may not be helpful, but you can watch the general direction of the market and with some study spot the warning signs that a change is coming.

The main advantages of short-term investments are one has to part with liquidity for a few days and weeks to a few months. These short-term investments allow more control over your money; it usually isn’t out of your possession for very long.

As mentioned above, short-term investments sometimes tend to be a lot riskier and show a much higher rate of fluctuation than their long-term counterparts. While there is a good chance that one will make money with a short-term trading, there is also a chance that you’ll lose money. This is especially the case when dealing with the stock market, since many of the short-term investors determine ‘precision’ timing to sell when the stocks are at their peak just before they begin to drop. Is it very easy to perceive or is absolutely a chance event!

Long-Term Stock Trading Strategies

Long-term investors demonstrate more patience than short-term traders. Buy-and-hold investors enter a stock position for the long-term and are not preoccupied with short-term market volatility. These investors outlook on the stocks is rooted in the belief that the stock market will provide a good rate of return over the long-haul and consciously or unconsciously are the followers of the exponents of Random Walk theory in the stock markets.

Just the opposite of short-term trading, long-term investments have the ability to gain a lot amount of money over a longer period of time depending on the volume of investments. The slow but steady pace of long-term investments allow for a much greater degree of stability and a much lower risk than short-term investments. They are also ideal for making one’s savings or retirement fund grow. The investments usually continue to grow over the years, maturing just as you need them.

Of course, the main disadvantage of long-term investments is that they can take a number of years to off load. And following this strategy, to set aside a sum of money for quite long a time is required and that too depends on your fund position – this is not a cup of tea for every investor.

The new volatility of the market with a bit of upward tendency is probably here to stay. In recent months after that abnormal share prices hike in 2010, it is expected that the market will behave normally for some time in the future. This has prompted us to measure the profit, if any, in this market for different kinds of traders and investors. For this, as in very study, we have followed a methodology under certain assumptions, which are listed below.

Methodology

w            The series of data chosen is for the time span: July ’12 through December 2013.

w            Each day trading is considered for all listed stocks.

w            During study period, on first trading day, the price selected is the lowest price of each traded stock, and after that the closing price is considered as the selected price for each traded stock.

w            To calculate daily market capitalization, the daily closing price and outstanding share of each stock is considered.

w            For each day, we have examined individual prices of stock to arrive at the weighted average for sector wise analysis. We are not enunciating in this study the profitability   of individual stock because of the sensitivity and in the process we will not give any indication as to which individual stock  was more profitable

w            The weighted averages of the sector wise prices was calculated  as:

Since sector wise analysis is considered here, the weighted average price is determined by averaging selected price and weight of individual sector.

Assumptions

Stocks do not move in a linear Hence, the key to higher net returns is to base investment decisions on the proper weighing of probable risk against reward. Leaving every risk aside, it would generally be better to hold for the longer term.

For the analysis of the current study, several assumptions have been taken which are as follows:

w            Short term return is calculated by the following scenarios and compare profits, if any, among these operators: 1. the large traders invest daily and get return at each T+3 period assuming that to begin with they  already have matured shares, 2. the small traders sale at T+3 period and after realizing the sale proceeds, they invest again, 3. some  traders sell shares waiting for  a  gap of 1 month and do not resort to sales on T+3 or on daily basis, 4. investors buy and hold for three months, 5. the status of profit for the shares bought at the peak period of 5 December-2010 compared with the end of December’13 price,

w            Opportunity cost for holding liquidity for a longer period has not been considered.

w            To remove complexities, Investors are assumed investing in only one sector.

Analyses

There are benefits and losses from both short and long-term stock trading with varying degree. Investors and traders used different strategies and analyzed stocks in various ways, and even in their own ways.  With the needed market knowledge and the ability to understand trading strategies to be successful and made more or less the appropriate stock picks and sales to arrive at most of the profits

From the analysis,  it tends to show that T+3 trading is more profitable than trading on a daily basis; waiting for 1 month is more profitable than the daily or T+3 trading; waiting for three months is most profitable compared to all strategies of trading under study.

From the big players’ daily trading, we can observe that except Life insurance, Pharma & Chemicals and Paper & Printing, other sectors have positive average return whereas, Mutual Funds & Tannery sector significantly flourished by 19.57% & 11.37% average   return.

We observed from our study on the recent past capital market data that Mutual Fund performed well – average return marked 19.57% in daily trading,  28.77% in T+3 trading, 48.26% in waiting for 1 month and  41.88% in shares sales after 3 months – it speaks that the Mutual Funds  thrived in all sorts of trading over the time span under study. Actually it is the natural phenomena with Mutual Funds that is whenever the market trend goes up, the overall return on Mutual Funds also flourishes. It is not only applicable for Bangladesh but also a common phenomenon globally.

Traders also made money on Travel and leisure, IT and Jute. Life insurance and ‘Telecommunication’ are also the worst performer, however, in the telecommunication sector, of two shares, ‘GP’ maintains overwhelming majority of market capitalization by 97%. The price of GP fell drastically in the three months period and that is responsible for pulling down the sector price.

From the analysis of 5th December 2010 to 31st December 2013, all sectors show negative return except the sector ‘Travel & Leisure’ which had only one stock that is united airways in 2010. But in 2012, Unique Hotel & Resort has been listed in the market and, therefore, included, so there is a hike in ‘Travel & Leisure’ sector by 18.68%.

Epilogue

In the overall scenario, holding for a longer period is more profitable than playing in the market daily, one who bought  the shares at the peak during 2010 still has to hold on ; it is very difficult to predict when to offload, if one wants to get out with profit.